Some invaders will slash prices to slice off chunks of your market
'Historically, 90% of foreign companies entering a new market have
competed on price.'
- Nicholas Hall, BMW
PRICE isn't all-important. According to conventional business
wisdom, it's quality that counts. That and service. But
don't bet on it - not when you're preparing to defend your
market territory against foreign incursions.
Obviously, not all sectors of the economy will face the
same degree of price-cutting by invaders. Some may not face it
One sector that will is the ...
Taking a short-term view, the Delta Motor Corporation,
which assembles Opel cars, Isuzu commercial vehicles and
distributes the Suzuki range of leisure vehicles, believes
invaders can only compete on the base of price in an over-
Rodney Rudman, strategy manager for passenger vehicles,
cites the Hyundai as an example. Assembled in Botswana, it
retails for 15% to 20% below the price for other comparable,
locally assembled vehicles.
He contends that the price differential compensates for
the lack of service and product support.
As the import duty begins to drop, the market will open up
to any vehicle manufacturer who doesn't already have a
presence in South Africa. Most will opt to import completely
built-up units to avoid massive investment in plant for local
assembly. Volvo, of Sweden, has already chosen this route.
Rumours indicate Peugeot and Citroen, of France, may follow
A plethora of new foreign competitors will play havoc with
motor industry pricing structures. They'll force local
manufacturers to import completely built up units themselves
to remain competitive.
Dropping prices will exert a downward pressure on vehicle
retail prices lower down the product line. And as retail
prices slide, manufacturers will have to address the issue of
reduced profitability. While this won't have a dramatic
impact on top-of-the-range cars, where substantial profit
margins are built in, it will affect base-line vehicles.
So price wars are inevitable as local manufacturers
prepare to defend their markets against price-cutting
Or are they?
To price cut, or not to price cut?
The Delta Motor Corporation won't engage in a price war
even if invaders slash prices in an attempt to gain market
share. It will instead concentrate on increasing the value
added component of its product line.
Nissan takes a short to medium-term view, during which
punitive import duties will make the importation of low
priced, high-quality completely built-up units impossible.
But if it does come to a battle, Nissan isn't scared of
becoming embroiled in a price war.
'We'll fight fire with fire,' says national sales director
David Pfaff, who wears the Fiat Uno hat at Nissan,
disagrees. Fiat Uno will not get involved in a price war, he
He argues that short-term gains in sales are no substitute
for greater profitability. Although foreign competitors may
gain market share by cutting prices, it's a strategy they
won't be able to sustain.
Low prices may initially attract purchasers, but Pfaff
maintains that long-term customer loyalty depends on an
efficient dealer network with well-trained personnel.
'This is the area where cut-price upstarts, such as Hyundai, will ultimately
fail in the long run.'
Samcor, which assembles Ford, Mazda and Mitsubishi
vehicles at plants in Pretoria and Port Elizabeth, views
price-cutting - dumping in particular - as a major threat to
the South African motor industry.
State-imposed protection, in terms of the new GATT
arrangement, will no longer shield local assembly plants from
Pointing to Hyundai as an example, managing director
Arthur Mutlow says these vehicles don't attract import duty because they come
into the country as allegedly 'manufactured in South Africa'. In fact, they
come in as almost fully built cars. The only missing components are bumpers
HOW GATT WILL IMPACT ON THE MOTOR INDUSTRY
South Africa has agreed to conform to the Uruguay round
of GATT. For the motor industry, this means that import
tariffs will be reduced from the current rate of 115% to
45% by the year 2002.
A Motor Industry Task Force has formulated a plan
called Phase VII to co-ordinate the deregulation process.
This will allow the industry to restructure to minimise
the impact on profitability and employment levels.
But Samcor's marketing research manager, vehicle
marketing, Mike Ewing, expects the price of Hyundais to double
in the near future when the government closes the loophole
that the Korean manufacturers found in the web of protective
He doesn't expect an influx of low-priced imports to play
havoc with the South African motor industry's price structure
in the short term. His reason: still-in-place punitive import
duties make imports more expensive than locally manufactured
But how will the local motor industry fare if the government accelerates
import tariff reductions?
Dereck Smith, also of Samcor, doesn't mince words. 'The
price of overseas products along with their quality will blow
domestic companies away.'
The cost advantage route
BMW's Nicholas Hall puts it another way.
'The most obvious and expected route that foreign
competitors will use when entering and penetrating the South
African market will be via cost advantages.'
They'll achieve these by importing vehicles instead of
setting up local plants. Deregulation makes this more viable
because the biggest investment is in the product itself.
Hall warns that local vehicle manufacturers are not really
equipped to defend themselves effectively against offshore
competitors who use this 'cost advantage strategy'.
The upshot could be that manufacturers close local
assembly plants and import fully built vehicles to exploit the
Local content woes for the 'heavies'
Pricing is also a major concern in the commercial vehicle
sector of the South African motor industry.
At the heart of the problem: the local content programme
and small production runs, which make local manufacture less
efficient than it is in Europe, the United States and Pacific
Local manufacturers have been at a cost disadvantage,
which has created a pathway into the local market for the more
cost-efficient producers. The 'get in' strategies of these
new players has been based on price.
Economies of scale overseas lead to the production of
vehicles there at a lower per unit cost. If foreign
manufacturers export fully built vehicles to South Africa,
they won't have to bear the cost of establishing, staffing and
maintaining local plants.
In their rush to get their vehicles on South African roads, international
competitors aren't averse to heavily discounting prices. They often sell
vehicles close to their cost price and try to recoup profits through the
sale of replacement parts.
LOCAL CONTENT DEFINED
The value of all direct local manufacturing costs,
including brought-in local components, assemblies and
manufacturing services, plus a total of remunerations
of people directly employed in the manufacturing
process in any capacity. - Ivan Philip in CommercialTransport.
As the motor industry braces itself to try and withstand a
ruthless round of price-cutting by foreign competitors, what are expectations in the ...
BUILDING AND CONSTRUCTION INDUSTRY?
Not all that rosy, according to Derrick Theck, group
financial director of Blue Circle Limited.
Blue Circle, wholly owned by Murray & Roberts,
manufactures and markets a range of basic building and
construction materials and products. In the company's sphere
are Blue Circle Cement, Ready Mix Materials and D&H Materials.
Price-cutting is always a threat as Blue Circle can
neither prevent foreign competition nor meet competitors'
price levels without pricing itself out of the market.
The company is particularly wary of the threat posed by
the weak rand, which will enable foreign competitors to
overcome the industry's high barriers to entry and huge start-
up and overhead costs.
Blue Circle identifies dumping as another major threat.
The marginal cost of producing cement is very low in
Europe. So in a world trade recession, when transport costs
are relatively low, dumping, which forces domestic prices
down, is a major threat.
Neither are prices set in concrete in ...
THE BANKING SECTOR
While most banks discount the possibility of a price war, Nedbank doesn't. As divisional director of the Commercial
Banking Division Jack de Blanche views the situation in a
'When one looks at the banking world, the price charged is the interest rate
charged. Overseas competitors will and are trying to lend money at cheaper
rates, playing havoc with pricing structures.'
ABSA puts forward a view held by most of the other banks.
It doubts that foreign competitors will attempt to build
market share at the expense of sacrificing immediate profits.
'Gone are the days whereby somebody wants to lose money
for the glory of having a presence,' says J Runewitsch, the
group's executive of corporate and merchant banking.
Does this also apply to the market for ...
Overseas chains entering the market will attempt to grab
market share on the basis of price.
'We know this,' asserts Joseph Jaffe, of Nando's
Chickenland. 'MacDonald's will come in ultra-cheap. Say
R1,99 a burger. We can't compete with that.'
But it doesn't worry him.
When MacDonald's enter, they'll service a different
segment of the market.
'MacDonald's is very, very fast and our main focus is not
on speed. We at Nando's do not regard ourselves as good fast
food, but rather as good food fast.'
So MacDonald's, if and when it arrives, will probably hurt
businesses such as Steers and Kentucky, which appeal more to
the lower and middle income groups.
Achilles Zoulas, marketing manager for the Steers Group
of Companies, adds the name Burger King, which falls under
He reckons that Burger King will probably arrive in South
'It has huge financial muscle and may be prepared to run
its outlets at a loss for up to 12 months to establish itself
in the local market.'
Does this mean that a bitter price war will tear the fast
food sector asunder?
Zoulas doesn't think so.
'A price war is not attractive to any party because there
are no winners at the end of it. Price wars create a false
'If a customer is only attracted by price, there is a
possibility of losing him when the price goes up again.'
A 1993 survey in the United States found brand switching
occurs randomly, depending on which fast food outlet offered
the best special at any given time.
And what does the ubiquitous range of Wimpy Restaurants feel about the
impending price-cutting invasion, particularly by MacDonald's?
Mafeno Phora, one of the chain's junior brand managers,
believes that the American fast food chain will initially set
up only one store - probably in Soweto. This will generate
positive publicity for the invader and become a useful testing
ground for further expansion.
MacDonald's will use a price war strategy to attract
customers initially and 'pump its presence' in South Africa.
But the initial rush will taper off when the novelty dies
The threat of a price blitz doesn't only apply to
restaurants and fast food merchants. It also applies to
industrial catering giants like the Fedics Group.
Since the primary objective of overseas competitors will
be to build market share, says Don Pigott, they won't be too
concerned about short and medium-term profits.
And how will Fedics react?
By fighting back on the basis of price.
'However, a price war will lower the base from which
profits must grow ... it will lower the invader's ability to
Also set for a shake-up is ...
THE BREWING INDUSTRY
Price-cutting to gain market share is inevitable, says
Adrian Botha, public affairs manager of the Beer Division at
the South African Breweries.
But he doesn't believe this is the best way of doing it.
'Consumer perceptions are built on the quality of a brand
and often, if you under-price a brand, the immediate reaction
is that the product is cheap and of inferior quality.
'This does not mean that there will not be price-cutting.
But it will be minimal as it will damage the product.'
Any offshore brewery contemplating a presence in South
Africa will need a lot of money to establish itself. The cost
of building a brewery, for example, can top R1-billion. Then
there are the millions needed to build brand awareness and
loyalty plus the cost of establishing distribution channels.
'If price-cutting does occur,' Botha observes, 'companies
will need huge amounts of capital to absorb losses and take on
SAB in a price war.'
There's also trepidation in ...
THE PROCESSED FOODS INDUSTRY
But Borden Foods isn't quaking in its corporate shoes. Henk Kleizen, general manager of the Consumer Division, sees
little prospect or scope for price-cutting in the short term.
Since Borden, which markets Cremora, Pasta Romana,
Make-a-Litre and Tubs Noodles, doesn't work to excessive
margins, there's little room to lower profits.
This is an industry-wide situation. So, if prices drop
significantly, many companies will be driven to the wall.
Some companies may be able to finance short-term losses,
according to Kleizen. But when they're forced to raise prices
in the longer term, they stand to lose newly acquired market
The dumping syndrome
The local food industry also faces the threat of dumping,
which could shred marketing strategies and seriously dent
bottom line results. It's a 'get in' method that's of great
concern to African Products.
The company processes maize into starch, glucose syrup and
other maize-derived products for the pharmaceutical,
confectionery, brewing and food industries.
National sales manager Stewart Krook points out that
deregulation will allow African Products to buy maize directly
from farmers to drive prices down. But it still won't be able
to compete with the price of maize-derived products that are
dumped on the local market.
Kellogg's, which holds an estimated 40% of the ready-to-
eat breakfast cereal market in South Africa, faces almost
certain price-cutting threats if other major international
players decide to make a bid for market share.
'Pricing could be one of the most important short-term
strategies of a potential entrant,' observes brand manager
But Kellogg's won't cut prices.
The underlying rationale is that price-cutting may lead to
changes in consumer perceptions of Kellogg's brands. The
customers may start believing that Kellogg's is cutting
quality, not just prices, or that Kellogg's has been 'ripping
them off' for the past number of years.
Also likely to attract foreign price-cutting competitors are sectors of ...
THE FURNISHING INDUSTRY
Let's consider Cape-based Nettex. It specialises in warp
knitting, printing and finishing of 100% polyester fibre
curtaining and allied fabrics. And managing director M C van
Wyk claims it's the largest operation of its type south of the
'Foreign competitors are likely to use a variety of
tactics in an attempt to increase their proportion of local
market share. It's probable that they'll enter the curtaining
market with products that are priced significantly lower than
those of local producers.'
And he fears that advanced technology will allow
competitors from the Far East to operate at a fraction of Nettex's costs.
'Lower costs and higher product quality will definitely
erode market share to the detriment of Nettex's profitability
Also in line for foreign competition is ...
THE RETAIL BOOK MARKET
Anthony Ward, a director of The Exclusive Books Group,
says big retailers entering the South African market will
probably discount heavily in the beginning and then slowly
raise prices to increase profits.
How will they minimise start-up costs and cover overheads?
By purchasing large warehouses on metropolitan peripheries
and fitting them out as a basic stores without elegant shop
fittings. They'll then stock these 'barns' with a large range
and depth of reading matter and develop them as self-service
stores to minimise staffing levels.
Another market heading for a rough ride is ...
THE CAR HIRE INDUSTRY
Major players in international car rentals will break into
the South African market by cutting prices. So says Richard
McGhee, of Budget Rent A Car.
Possible offshore competitors include Alimo, an
aggressively marketed American car rental service, Eurodollar
and Euro Car Inter Rent.
Their first task on landing: to capture attention.
They'll do it by dragging prices down and simultaneously
enhancing levels of service.
Invaders will initially target the leisure market, of
which local car rental companies have only a small share. By
lowering normal rates available to this segment, Alimo,
Eurodollar and Eurocar will try to dominate the market by
offering attractive and tempting packages - ideal for weekend
getaways with family and friends.
After establishing a strong foothold by raiding the leisure market, invaders
will begin competing head-on with Budget in the corporate market. They'll
offer business people rates comparable to those they've established in the
leisure market and promote their services on the basis of low rates equal
Major price upheavals are also expected in the ...
A sudden flood of international competition will probably
lead to a vicious price war in the pharmaceutical sector,
warns R A H Bhikha, managing director of BE-TABS
He says invaders will be motivated by only two factors:
But incoming companies won't be able to depress prices
indefinitely. They'll be limited by the amount of financial
muscle they possess and the length of time shareholders will
allow them to operate without making profits.
Also concerned about pricing are companies involved in manufacturing and marketing ...
HEALTH-CARE, BEAUTY AND CLEANING PRODUCTS
SmithKline Beecham, Unilever SA, Johnson & Johnson,
Colgate-Palmolive and Adcock Ingram Consumer Products perceive
their main threat to be Proctor & Gamble (P&G).
An analysis by SmithKline Beecham of P&G's entry into
Australia shows that the United States-based company moves
quickly, bringing in products manufactured overseas at very
competitive prices. And it generally launches with tremendous
marketing and advertising support.
Patrick van Hoegaerden, of Lever Brothers, has a different
perspective. While he acknowledges P&G as a major threat, he
doesn't believe they'll cut prices to get into the South
'From what we know of Proctor & Gamble, they are best at
selling products at a premium. So they're most likely to come
in from the top end and may even sell their products at a
higher price than we sell ours.'
Everyday low pricing
However, all local players expect P&G to implement a brand
development plan which evolved from an "Everyday Low Pricing"
strategy that attempts to save on retailer trade promotions.
This plan - an extension of value-pricing - allows retailers
to receive upfront promotional funds based on past
What worries them is P&G's international reputation for
deep market penetration and its resolve to stop at nothing to
achieve market dominance.
Another sector that expects competition on the basis of price is ...
THE TEXTILE CHEMICAL INDUSTRY
The CHT Group of Companies expects invaders from the Far
East to strike with lower prices, the result of access to
cheaper and more productive labour markets, economies of scale
production and export subsidies.
Like the Japanese, the attackers will apply 'a profit-
neglecting selling strategy'. This is the low-cost, high
volume production of limited production lines that allow the
use of price as a major competitive tool for achieving sales
Competitive pricing has always been a problem for ...
THE PAPER PRODUCTS INDUSTRY
Wayne Scrooby, product manager in charge of coated grades
and tissue at Sappi Fine Papers, doesn't try to hide the fact.
'Pricing has always been a problem for us to due to
inefficiencies and high costs. Our prices were originally 20%
more expensive than imports.'
Main culprit: methods of distribution. A customer may
choose one of two methods of purchasing. He can:
go to a merchant who will place an order with a mill, receive the paper and deliver it to the customer, or
place an indent order through the merchant, in which
case the mill will deliver the paper directly to the
The latter system lowers the cost to the customer because
the merchant's involvement is only administrative. To
counteract this procedure, Sappi introduced its own indent
procedure, which leads to significant savings by customers.
Scrooby identifies his main foreign competitors as Magno
Print and Lumi Art in Germany, and Comdat in France.
'If these or any other competitors attempt to build market
share through price-cutting, Sappi will not hesitate to lower
prices in response.'
Not that Sappi wants to engage in a price war.
Although the company claims it has the financial clout to
wipe any single importer or local producer out of the market, Sappi will lose money. In addition, eliminating competition
will reduce the customer's choice of paper ranges.
Foes in Finland
While the South African market, which consumes about 550
000 tons of paper products a year, is small by international
standards, it has attracted the interest of Finnish paper
Fins, Mondi Paper alleges, used price-cutting to wrest a
large portion of the South African market from local
The Fins devalued their currency by 50% over two years
while their unions agreed to lower wages. The South African
import tariff on paper products and raw materials is currently
low by world standards at 10%, so Mondi was afforded little
protection from the price-cutting.
Also preparing their defences to counter the offshore threat are companies in ...
THE MANUFACTURING AND ENGINEERING SECTORS
Cullinan Industrial Porcelain (CIP), which manufactures
electrical porcelain insulators, has already begun to feel the
adverse effects of price-cutting by foreign competitors.
Although sales manager Jan Beukes reports a minimal 2% to 3%
loss of market share, he expects this to increase.
'The use of a price penetration strategy by invaders has
made it impossible for CIP to compete on price. Our costs are
already significantly higher than the international selling
CIP recently lost a R1-million Eskom contract to an Indian manufacturer
on the basis of price.
Another problem: the world market for insulators has been saturated.
Consequently many foreign manufactures are dumping their excess stock in
South Africa at ridiculously low prices.
So now's the time to ...
REVIEW YOUR PRICING STRATEGY
You have five options:
Adopt a 'bugger them' attitude and keep your prices as
Slash your prices to undercut the undercutters.
Adjust your prices downward to meet those of the
Increase your prices and target a niche market.
Cut costs to lower your prices and add value to
Select either of the first two options and you could find
yourself in the bankruptcy court.
Select options three and
four and you need the financial clout to outlast the
Your best bet is option five. It involves using your
resources - human and material - more efficiently. It may
involve restructuring your organisation from top to bottom.
It will certainly involve developing a customer service
culture. I go into more detail later.
DOES PRODUCT QUALITY COUNT?
While low prices may initially attract consumer attention, they don't
always lead to ongoing customer loyalty. There are other factors that count.
Like the quality of the product and its availability. Both depend on
research and development and labour's skills and productivity. Taking these
into account, how does South Africa measure up in global terms?
In many respects, not very well.